The Wall Street Journal-20080214-Rio Tinto-s Earnings Illustrate Why It-s in Play

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Rio Tinto's Earnings Illustrate Why It's in Play

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Mining giant Rio Tinto reported an 11% rise in net income for the second half of last year as rising costs offset higher prices for minerals like iron ore and copper -- two dynamics behind a roughly $137.7 billion unsolicited takeover offer from rival BHP Billiton.

Rio also said it doesn't have specific plans to work with new investors Aluminum Corp. of China and Alcoa Inc. to fight off BHP's bid, which it says undervalues the company. "It is clear there are opportunities for us to work together," Rio Tinto Chairman Paul Skinner said, referring to the Chinese company, known as Chinalco, and Alcoa.

The two companies two weeks ago bought a $14.05 billion stake in Rio Tinto, representing about 9% of the overall company. Rio Chief Executive Tom Albanese said the company has begun talking to Chinalco and that he plans to talk again after the Chinese New Year. Mr. Albanese said he believes the state-controlled Chinese aluminum maker is interested in a long-term investment, but declined to speculate whether Chinalco and Alcoa would back or reject the offer.

Rio's results underscore the dynamics behind a mining merger boom. Rio, BHP and others say the four-year boom in commodity prices has legs, as China and other quickly developing nations ratchet up consumption. They also say combinations in general make sense as prices rise for such things as energy, transportation, equipment and know-how. Both trends are driving up the cost of steel and many other commodities.

But some industry observers think prices are close to their cyclical peak as more metals and minerals come on to market this year. While China, Brazil and India will remain strong consumers, the slowing economies in U.S. and Europe may damp the upward demand.

"Although we believe that emerging markets are going and will be going through a structural shift, we believe in cycles within cycles," said Tobias Woerner, mining analyst for MF Global Securities Ltd. "It is for this reason that we are somewhat more sanguine about the impact of the U.S. housing slowdown and the resulting credit crunch on emerging markets."

Rio's Mr. Albanese has been making the case to shareholders that the firm has higher value long-term. He is also gauging their support for the company's stance against BHP's offer. He is meeting with shareholders in Australia this week and in North America next week and is expected to tout a strong earnings outlook.

Rio Tinto's results came despite higher costs and the weak dollar, as much of the mining process is done in countries with a stronger currency. In the second half, Rio reported net earnings of $4.06 billion, compared with $3.64 billion in the second half of 2006. For the year, net earnings fell 1.7% to $7.31 billion.

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Jeffrey Sparshott contributed to this article.